GST for today, tomorrow and beyond

By Chan Quan Min

This is the fourth and final part of a series on the controversial goods and services tax (GST). Fresh from studying the implications for businesses, we take a look at the larger economic impact of GST and question if we can compare the experience of other countries to ours.

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Malaysia’s GST, slated to come into operation in 2015 at the earliest would not be a revolutionary development on the international stage.

Multi-stage GST in some shape or form exists in some 156 countries or tax jurisdictions worldwide. Notable exceptions include: the United States, which has maintained its unique patchwork of localised sales tax collecting authorities and oil rich nations such as Brunei, which do not even collect any direct taxes (income and corporate) to begin with.

Economists and tax experts view GST as a natural and logical progression from the SST. They argue that the GST is a more comprehensive and efficient means of taxing consumption, or in other words, consumer spending.

Sales and service tax (SST) has been in force in this country since the 1970’s. The second part of this series explained briefly the similarities and differences between the SST and GST.

First the similarities, both the SST and the GST are indirect consumption taxes.

Several key differences separate the SST from the GST. Key among them; SST is single-stage whereas GST is a multi-stage tax on every level of the supply chain; SST by nature, requires the tax collecting authority to include items into a list of taxable items, GST in comparison is far more broad in its reach.

According to Yeah Kim Leng, Chief Economist at RAM (formerly Rating Agency Malaysia) the GST system is well suited to both developed and emerging economies alike. Emerging economies such as Malaysia can adapt the GST system through the use of zero-rating and exemptions to reduce the impact on lower income groups.

Yeah concurred that GST is similar to the SST but has several qualities that put it ahead in terms of economic efficiency and tax enforcement.

GST doomsayers would be disappointed to learn the introduction of the GST is merely akin to a software upgrade from the SST, and even more so if the government were to keep to their word and introduce the GST at a revenue-neutral rate.

At a revenue-neutral GST rate the macroeconomic impact of GST introduction would be minimal, economists predict. Importantly, inflation would remain stable or move only very slightly.

Economic modelling studies some years back believed to be the work of the accomplished Australian economic modeller, Chris Murphy (work commissioned by the Ministry of Finance) predicted little or no overall change in the Consumer Price Index (CPI), a measure of inflation, at a revenue-neutral GST rate of 4%.

But macroeconomics is a science based on many assumptions. Hence use of the popular expression ‘all things being equal’ after every projection statement.

Once the Malaysian GST comes into operation, inflation will go up but only as a one-off event. Regardless of the stated intention for the GST to be introduced as a replacement tax at a revenue-neutral rate, some unscrupulous traders may take the opportunity to increase prices, shared an officer at the GST unit of the Royal Malaysian Customs.

Murphy’s work, KiniBiz assumes, does not take into account the autonomous behaviour of individual traders to increase prices, a truly Malaysian experience in itself.

Start small, and then work your way up

The same GST doomsayers could have the last laugh if, after a short introductory period, the GST rate is increased further.

This is not something that is impossible judging from the GST experience in Asean as a whole, but more specifically Singapore and Japan.

If and when introduced at a rate of only 4%, Malaysia would boast the lowest such multi-stage consumption tax rate in the region. Both Singapore and Thailand would have higher rates of 7%. The remaining Asean countries with an existing GST would have even higher rates of 10% or above.

In many instances, countries first adopt GST or the European equivalent, VAT (value-added tax) at an introductory rate only to increase the tax rate anywhere from a few years to decades later.

Take for instance Singapore; their GST was first introduced in 1994 at 3%. Nine years later in 2003 the rate was upped to 4% and subsequently to 5% in the year after that. As it stands, Singaporeans pay 7% in GST. This was after a third increase in the tax in 2007.

While it may be just conjecture at this stage, the Malaysian government could be seriously contemplating a GST rate above 4%. But whether the government will choose to begin with a low introductory rate for a few years and later increase it or push through a higher rate above the revenue-neutral level at the first instance is up for debate.

According to Yeah of RAM, a revenue-neutral rate of 4% would not result in much of a sustained increase in indirect tax revenue outside of efficiency gains; therefore he recommends a higher rate of 7%.

Recent news reports have several personalities suggesting the same, a higher rate of 7%, for the purposes of greater tax revenue security. They include the Inland Revenue Board (IRB) director-general Mohd Shukor Mahfar and minister in the prime minister’s department, Idris Jala.

In 2012, the federal government reported sales tax collection of RM8.97 billion or 6.6% of tax revenue that financial year and an even lower 4.8% of total reported revenue of 186.9 billion.

Compared to developed countries with matured GST systems, Malaysia’s indirect tax share of the total tax revenue pie is decidedly small. Note the definition indirect tax is a classification term for both SST and GST.

‘Japan is ageing, Malaysia is still growing’

Japanese Prime Minister Shinzo Abe made Tuesday’s international news headlines after he announced a long awaited increase in Japan’s consumption tax from 5% to 8% effective April next year.

(News reports have used the semantically inaccurate definition ‘sales tax’ to refer to the Japanese consumption tax; the official translation used by the Japanese government continues to be ‘consumption tax’ for the GST-like multi stage tax)

The April consumption tax hike will be the first such increase since 1997 for the land of the rising sun.

According to the median calculation of economists surveyed by Bloomberg News, the consumption tax increase will cause the economy to contract an annualised 4.5% in the first three months before eventually returning to growth.

Japanese policymakers were quoted by the BBC as saying the decision was needed to reduce the Japan’s public deficit – currently more than twice its GDP.

Abe, who is possibly the most popular Japanese prime minister in office in recent years, is credited with reinflating the economy from the doldrums. Abenomics, as his series of aggressive policies are popularly have reportedly started to have some impact on growth.

While Malaysia, pending an official announcement, is likely to only see its long-awaited GST come into force in 2015 at the earliest, Japan has had a similar tax imposed for over two decades. Japan’s consumption tax was first introduced in 1989.

A noteworthy observation from the Japanese April sales tax hike is the economists’ prediction of a three-month slump before an eventual return to normal growth.

Yeah says the same will not happen when Malaysia’s GST comes into operation because Japan and Malaysia are two very different economies.

The inflationary pressure of a consumption tax hike in Japan will dampen consumption, Yeah explained, but the same cannot be said to be true for Malaysia.

“Japan is an ageing economy whereas Malaysia’s working population is growing steadily,” Yeah said. “Over the long-term, the correlation between inflation and consumption patterns is not that strong for Malaysia.”

Tax reform needed

While the discussion on GST has been quite lively, it must be understood that wider tax reforms are needed to strengthen the government’s tax revenue base.

Tax experts very pragmatically espouse tax systems that fulfil requirements of economic efficiency and help achieve equitable distribution of income.

Therefore, it is not a coincidence that most if not all income tax systems worldwide are progressive. That is, the rich are taxed proportionally more heavily than the less fortunate.

While introducing the broad-based GST will go a long way to achieving some measure of efficiency in tax collection, there is one area where the taxman does not yet have reach.

At present, Malaysia does not yet have a capital gains tax, a tax on the gains realised through the sale of stocks, bonds, precious stones, etc.

Neither do those capital gains listed above come under the purview of income tax.

A capital gains tax can go a long way in regulating the movement of money in the economy and ensuring that individual who derive their earnings from the stock market does not get to avoid the taxman whilst the salaryman gets his taxes deducted at the source.

Tax reform in Malaysia is not complete and needs to address the shortcomings in the current system, but the GST will be a step towards international standards.

Yesterday: GST compliance falls squarely on businesses